International Law Advisory - DoD Publishes DFARS Final Rule Regarding Contractors’ Compliance with Export Control Laws

On April 8, 2010, the Department of Defense (DoD) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to insert a clause addressing contractor responsibilities regarding export-controls.  See 75 FR 18030, available at http://edocket.access.gpo.gov/2010/pdf/2010-7258.pdf.  The new rule modifies a prior interim rule published by DoD in July 2008, which was preceded by two proposed rules – one in 2005, the other in 2006.  As described in a Steptoe international advisory, the interim rule added two clauses to the DFARS – one to be used when it was anticipated that export-controlled items, including software or technical data, would be involved in the performance of a contract, and one to be used when it was believed that export-controlled items would not be involved.  DoD has stated in the final rule that it has determined that one simplified clause better serves the goal of ensuring that contractors are aware of their export compliance responsibilities when performing work under DoD contracts.  At its essence, the final rule simply reminds contractors of their obligations under the ITAR and the EAR, as administered by the Departments of State and Commerce.  The final rule does not impose additional substantive requirements on contractors, though flowdowns are mandated at all contracting tiers.  It is likely that many in the industry will consider the final rule to be an improvement over the interim rule and its unwieldy predecessors.

Background

The final rule has been some time in the making.  DoD’s 2005 and 2006 proposed rules attracted numerous comments expressing strong concerns.  That was because the first proposed rule appeared to contemplate placing significant compliance requirements on contractors above and beyond those specified in the ITAR or EAR.  The second proposed rule, while somewhat more modest, would have resulted in contracting officials essentially being involved in export control classification determinations, with the potential for confusion given the established roles of agencies such as the Department of State, Department of Commerce, Nuclear Regulatory Commission and Department of Energy in determining what items are subject to US export controls.  In the aftermath of these proposed rules (the second of which generated 167 public comments), Section 890(a) of the National Defense Authorization Act for Fiscal Year 2008 (Pub L. 110-181) required DoD to issue a regulation no later than July 27, 2008 to address requirements for DoD contractors to comply with export control laws and regulations. As a result, DoD issued an interim rule on July 21, 2008.

The interim rule was a relatively modest and scaled back version of its predecessors, particularly the first proposed rule.  It set forth a two-clause approach to addressing export controls in DoD contracts.  Contracts which were anticipated to involve export controlled items were to have one clause (which would be flowed down to similar subcontracts), whereas for solicitations for fundamental research only where no export-controlled items were expected to be involved, or solicitations for supplies or services where it could not be determined if export controlled items would be involved, another clause was to be used.  However, as to the second clause, it required contractors to notify the contracting officer if during contract performance they determined that they would need access to export controlled items or generate them so that the contract could be modified to include the first clause or terminated for convenience.  The second clause did not have a flowdown requirement.

Public Comments and Final Rule

The final rule published by DoD requires that one clause (rather than two clauses) relating to export controls be used in all solicitations and contracts, regardless of whether it is anticipated that the contract will involve work with export-controlled items.  That clause, found at 252.204-7008 of the DFARS, broadly defines “Export-controlled items” to mean items subject to the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR).  The term includes commodities, software and technology.  The clause states that “[t]he Contractor shall comply with all applicable laws and regulations regarding export-controlled items…”  It refers contractors to the Departments of State and/or Commerce if they have any compliance questions.  The clause also states that the obligation to comply with export control laws exists independent of the DFARS clause, and that nothing in the DFARS clause changes or modifies any other federal laws or regulations, including the EAR or ITAR.

In publishing its final rule, DoD addressed comments received from various persons and entities, and in many cases made changes in response to the comments.  Many of the comments were addressed through DoD’s decision to use one clause rather than two.  For example, some commenters stated that the interim rule was too complicated and needed to be simplified.  Others commented on whether it should be the responsibility of DoD to inform contractors whether items, technical data, or research are export controlled, and in particular whether they are ITAR-controlled.  Some felt that DoD should play this role, while others noted a concern that it may complicate jurisdictional determinations that are presently made by other export agencies.  DoD acknowledged some advantages to using only one export compliance clause rather than two, noting that it continued to serve the purpose of raising awareness among contractors while simplifying the DFARS requirement and eliminating possible ambiguities between existing export control laws and DFARS requirements. 

A variety of other comments were received and addressed by DoD, including, among others:

• A commenter noted that the interim rule created confusion as to whether a contractor who makes a disclosure to the Departments of State under the ITAR or Commerce under the EAR also would need to make a disclosure to the DoD contracting officer.  The relevant language, found at 252.204.7008, was amended in the final rule to make clear that the Department of Commerce and State have authority over the EAR and ITAR and that the rule neither adds to, waives or supersedes any requirements of the EAR or ITAR. 
   
• Several comments raised various concerns relating to the possibility that certain types of fundamental research may improperly be viewed as export controlled.  DoD removed specific reference to fundamental research from the final DFARS clause.
  
  
• Comments expressed concern about a clause allowing termination of the contract for the convenience of the Government if it was determined at some point after the contract began that export-controlled items would be involved.  DoD removed this provision.

Overall, DoD’s slimmed down rule is likely to be viewed positively by many contractors in that it does not impose additional requirements upon them, but instead simply reminds them of the need to comply with export controls.  The approach DoD ultimately took is not dissimilar from how US economic sanctions compliance is currently treated in FAR 52.225-13, which essentially reminds contractors of OFAC sanctions but does not impose different or inconsistent obligations. 

Over the long term though, as we noted in our advisory in 2008, the increased “contractualization” of international compliance requirements in the FAR and DFARS may have more significant ramifications for defense contractors.  For instance, whereas in the past a violation of export control law was not necessarily a violation of a contractual requirement, under the interim and now final rules, failure to comply with export control laws could be viewed as a contractual violation, though unlike certain other government contract clauses such as human trafficking, there are no independent contractual remedies specified in the clauses in the interim rule nor in the final rule, and the language of the final rule and discussion in the preamble make clear that the rule is not meant to impose new substantive obligations (or liability risks) on contractors. 

As a result of requiring a flowdown, DoD seems to be reminding the contractor community that export control compliance is an essential matter to address between prime contractors and subcontractors.  Therefore, the existence of the clause may be a helpful means for primes to remind smaller and perhaps less experienced subcontractors of the need for export control compliance, including in situations where potential export activity may not be so apparent, e.g., when export-controlled technical data, technology or software source code is released to foreign nationals even in the United States.

If you have any questions regarding the final rule please contact Andy Irwin at 202.429.8177, Meredith Rathbone at 202.429.6437 or Ed Krauland at 202.429.8083.  If you have additional questions regarding government contracting issues, please contact Tom Barletta at 202.429.8058.